Did Franklin Templeton Crisis Lead Sebi To Come Out With Consultation Paper On Insider Trading in MFs?

The Securities and Exchange Board of India (Sebi) has come out with a consultation paper to bring mutual fund dealings under the ambit of insider trading rules. 

Sebi wants to cover the dealing of mutual fund units under the Prohibition of Insider Trading (PIT) Regulations, 2015 to harmonise the regulations governing the trading in securities, while in possession of Unpublished Price Sensitive Information (UPSI).

PIT Regulations are applicable to dealing in securities of listed company or proposed to be listed, when in possession of UPSI. The units of mutual funds are specifically excluded from the definition of securities under the PIT Regulations.

The proposal comes after Sebi observed that a Registrar and Transfer Agent of a mutual fund and key personnel had redeemed all the units from a scheme, being privy to certain sensitive information pertaining to the scheme of a mutual fund, which was not yet communicated to the unitholders of that particular scheme.

The 22-page consultation paper begins with the statement “In the past, it was observed that a Registrar and Transfer Agent of a Mutual Fund had redeemed all the units from a scheme, being privy to certain sensitive information pertaining to scheme of the Mutual Fund, which was not yet communicated to the unitholders of the particular scheme. Similarly, in another instance, a few key personnel of a Mutual Fund were found to have redeemed their holdings in the schemes, while in possession of certain sensitive information not communicated to the unitholders of the schemes.”

Sebi has in this consultation paper, however, not specifically mentioned the names of either registrar or the key personnel who had redeemed their investment, though it is more than obvious as to who the market regulator is pointing fingers at.

The Franklin MF Episode

To understand the entire episode, let’s go back to two years when the country was struggling with first wave of the Covid-19 pandemic, and people were locked inside their homes. On April 23, 2020, Franklin Templeton mutual fund decided to shut six schemes for redemption, and locked up investment worth around Rs. 26,000 crore of little more than 300,000 investors.

Later in a Sebi enquiry, it was found that some of the key personnel of the fund house had redeemed their investments prior to the announcement of the closure of the scheme. Vivek Kudva, Head of Asia Pacific for Franklin Templeton MF, his wife Roopa, and mother, Vasanthi had redeemed over Rs. 30 crore from the debt schemes between March 20 and April 3, 2020. 

In June 2021, Sebi imposed a penalty of Rs 7 crore on Vivek Kudva and his wife for undertaking redemptions just before announcing the closure of the six funds. They were also directed to deposit 22.65 crore plus interest at 12 per cent in an escrow account.

Another company, MyWish Marketplaces, where Vivek Kudva and Amit Sethi were directors, withdrew around Rs. 22 crore during the same time, and they were slapped with a fine of Rs. 5 crore by Sebi. The market regulator also slapped a fine of Rs 50 lakh on Venkata Radhakrishnan, director of Franklin Templeton MF and his wife, Malathi. All these people have used their positions and non-public information for their own benefit, it was found.

The Verdict

In the consultation paper, Sebi has now underscored the definition, meaning and interpretation of the terms, ‘connected person’ and ‘designated person’, among others.

Besides, Sebi has also asked the public for their opinion on whether these definitions should be broadened for further clarification towards investor protection and awareness. 

Experts are unanimous in their view that this is a good move in the right direction.